India's pharma sector troubles may not end for another two years; worth buying shares now?

Highlights

• S&P BSE Healthcare gave negative returns of 11% in one year
• Nifty and Sensex rose by 22% and 21.6% respectively since May, 2016
• Delay in US FDA approvals for Indian companies impacted sales in US market

Pharmaceutical companies have been under stress from quite some time particularly companies with high exposure in the US market. 

As the companies facing headwinds, the pharma stock prices have halved to nearly 40% over the past one year. 

IIFL in its research report on the sector, gave three major reason for the poor performance of the pharma companies in one year. Firstly, price erosion in generic portfolio in US (US forms ~40% of revenues) due to competition and consolidation of buyers has resulted in a steeper decline in revenue & margins. Secondly, in addition to the regular non compliance warning letters by US FDA to most of the Indian Pharma majors. Thirdly, volatility due to Trump Presidency and appreciating rupee is plaguing the sector.

ALSO READ: Sun Pharma shares touch new lows as pricing pressure in US continues

Here's a look at S&P BSE Healthcare sector vs Nifty and Sensex in one year.

Clearly, Healthcare sector has performed poorly in one year. If we look at only S&P BSE Healthcare, the benchmark has given negative returns of 11% in one year as against Nifty which rose by 22.5% and Sensex by 21.6%. 

Speaking with Zeebiz, Anand James, Chief Market Strategist at Geojit Financial Services, said Pharma attractiveness last year, was expectation of Trump regime’s health care proposals could turn out to be being supportive for Indian pharma companies. But not only have Trump’s plans hit road blocks, Indian pharma companies have come under twin pressure of competition as well as FDA observations.

According to Sarabjit Kour Nangra (VP Research- Pharma, Angel Broking), said, "The reasons have been plenty, where all that could go wrong had gone wrong. In, exports key market USA, saw challenges in the form of 483’s and import alerts, for most of the major companies. Also the number of approvals from the USA FDA got delayed, and hence there was an impact on the US sales of the companies, which was profound as the US accounts for close to 40% of Indian pharma exports and remains the biggest market for Indian generics."

Apart from the USA, back home in India, the companies faced challenges on back of the government putting couple of drugs under the pricing pressure, which impacted the domestic sales of the Indian companies.

Should you invest in sector?

Sharing the outlook of the sector, IIFL in the report mentioned that though it is tough to predict the ending of such issues, we believe that some of these issues will get sorted over the next two to three years due to the corrective action taken by these companies. Also, strong product pipeline and increasing product launches over next couple of years by Pharma companies will more than offset the price erosion effect in the base portfolio. 

Having similar positive views on the sector, Nangra said, "While the domestic sales for some companies have normalised in 4QFY2017, others could see some uptick during FY18. On exports front, especially USA saw the pricing pressure intensify in 4QFY2017, which was more pronounced with low launches. However, the sharp fall in stock prices has also resulted in the valuations of these stocks becoming attractive, and hence we believe this provides the long term-investors an entry point."